"In the short run, the market is a voting machine, but in the long run, it is a weighing machine."

 

This image from Brian Feroldi (a well-known financial educator) presents a brilliant and simple visual metaphor for what drives stock prices over different time horizons. It perfectly captures a fundamental truth of investing. Let's break it down, discuss its meaning, and expand on the concept.

Decoding the Image: A Hierarchy of Influence

The structure shows a cascade of factors, with the most frequent, noisy drivers at the bottom and the most powerful, slow-moving ones at the top.

1. Top Tier: Decades → Earnings (The Foundation)

   • Concept: Over decades, the primary driver of a stock's value is the underlying company's earnings (profit). This is the bedrock of intrinsic value. A company that consistently grows its earnings over 20-30 years will almost certainly see its stock price rise substantially over that period, regardless of short-term volatility.

   • Expansion: This aligns with the Buffett-style philosophy of investing. It's the "weighing machine" in Ben Graham's famous analogy: "In the short run, the market is a voting machine, but in the long run, it is a weighing machine." The "weight" is the cumulative earnings and cash flow.

2. Middle Tier: Days to Years → Sentiment (The Dominant Noise)

   • Concept: Over shorter periods—days, months, even a few years—stock prices are predominantly whipped around by market sentiment. This includes:

     • Investor Psychology: Fear and greed.

     • Macro-News: Interest rate changes, inflation reports, geopolitical events.

     • Narratives & Hype: "The AI story," "rate cut hopes," "recession fears."

     • Technical Trading: Algorithms, chart patterns, momentum.

   • Expansion: This is the "voting machine." Prices fluctuate based on what people feel a stock is worth today, which often has little to do with its long-term earnings power. This layer is why the market is volatile and often irrational in the short term.

3. Key Insight from the Structure: The image shows "Sentiment" appearing far more often than "Earnings." This is the critical point: Most of the time, most of the price movement you see is noise (sentiment), not signal (fundamental change in value). Earnings reports are discrete events (quarterly), while sentiment is a constant, swirling tide.

---

Expanded Discussion & Implications for Investors

1. The Clash of Timeframes:
This framework explains why investors with different horizons talk past each other.

• A day trader lives exclusively in the "Sentiment/Days" layer. Fundamentals are nearly irrelevant to them.

• A long-term investor should focus on the "Earnings/Decades" layer and learn to ignore the sentiment-driven gyrations in between. Their job is to assess whether a company's earnings power is likely to grow over the next 10+ years.

2. Where Does "The Business" Fit In?
An implicit layer exists above "Earnings": Business Fundamentals & Competitive Advantage.

• Earnings don't grow in a vacuum. They grow because a company has a durable moat, excellent management, innovates, and operates in a growing market. Over the very longest term (multiple decades), it's the quality and sustainability of the business itself that drives earnings, which in turn drives the stock.

3. Practical Investor Takeaways:

• Identify Your Timeframe: Are you trading or investing? Your strategy must align with the relevant driver layer.

• Tune Out the Noise: For long-term investors, understanding this hierarchy is liberating. It allows you to see a market crash or a hype-driven rally for what it often is: a violent shift in sentiment, not necessarily a change in the long-term earnings trajectory of your companies.

• Use Volatility: Understanding that sentiment is fickle allows savvy investors to buy when sentiment is unjustifiably negative (creating a discount) and be cautious when sentiment is euphoric (often leading to overvaluation).

• The Bridge Between Layers: The moments where "Sentiment" and "Earnings" intersect are crucial. A stock with great long-term earnings potential (top layer) can be held back by poor short-term sentiment (middle layer) until an earnings report (the bridge) confirms the story, potentially aligning sentiment with fundamentals.

Conclusion

Brian Feroldi's simple graphic is a powerful mental model. It reminds us that:

• In the short term, the stock market is a narrative-driven popularity contest (Sentiment).

• In the long term, it is an earnings-driven weighing machine (Earnings).

The greatest challenge—and opportunity—for investors is to maintain the conviction to focus on the long-term "Earnings/Decades" signal while navigating the deafening, daily "Sentiment/Days" noise. Success lies in betting on durable earnings growth and having the patience to let that top-tier driver ultimately prevail.

The Pricing Game versus the Value Game

http://www.valuewalk.com/2017/10/a-pundits-paradise/

Speculators, Investors and Market Fluctuations

Speculators versus Investors

Mark Twain mentioned the two times in life when one shouldn't speculate: "when you can't afford it, and when you can!". 

Speculators buy in the hopes or assumptions that others will want to buy the same asset (be it a painting, a baseball card, or a stock) later.

Investors buy the cash flow the investment returns to its owner. (As such, a painting can never be an investment by this definition!)

Stock Market Bubbles

Bubbles in the stock market form due to faulty logic that first propels speculators to bid up prices followed by the inevitable bursting which destroys the wealth of many.

What determines whether an investor will make money in the market or not?  

The answer is his psychological make-up. 

If he does his own stock analysis and views the prices offered by Mr. Market as an opportunity to buy low and sell high, he will do fine. 

If Mr. Market's offering prices guide the investor's outlook of what the stock price should be, he should get someone else to manage his money!

Market fluctuations

Most market fluctuations are the result of day-to-day distortions between supply and demand of particular stocks, not of changes in fundamentals.

Investors who take advantage of these distortions by focusing on the fundamentals will be successful. 

Those who invest with their emotions are sure to fail in the long-run.

Read also:

• 
  
• Your investments using Mutual Funds or Money Managers
• Trading and portfolio management from a value investing point of view
• Value Investor's Opportunities in Distressed Securities
• Value Investing Opportunities in the Banking Sector
• Look at FUNDAMENTALS and POTENTIAL CATALYSTS when making investment decisions
• Where to look for Investment Opportunities
• Business value cannot be precisely determined. Make use of ranges of values
• Central elements to a Value Investing Philosophy
• The Philosophy of Value Investing and Why It Works
• Philosophy of value investing. Need to have clear strategies too
• How Wall Streets can create investment fads? The Junk Bond Market of mid-1980s
• Understanding these changes in the investment world allows investors to earn superior returns
• What's good for Wall Street is not necessarily good for investors
• Speculators, Investors and Market Fluctuations

While stocks are certainly getting pricier, they do not appear to be irrationally overvalued.

Nine reasons to smile about the stock market

By John Wasik

CHICAGO | Mon Feb 25, 2013 5:51pm EST

(Reuters) - Over the past few months, it has been much easier to make a case that widespread financial anxiety is easing, although trying to quantify the upsurge can be like trying to catch a frog. As soon as you grab for it, it jumps.

At the beginning of last year, investors were grouchy about nearly everything and kept putting money into bond funds, while the stock market slipped. Then numerous economic indicators started pointing north and sour global financial news became less prevalent, and the tide turned as money started flowing out of bonds and into stocks.

As financial anxiety eases, investors feel they can take more risk and worry less about the worst-case scenario. This is good news for the overall economic picture in the United States.

While there are sure to be bumps in coming months, the prevailing trend is for a sluggish recovery in the United States and abroad and the current stock rally - the S&P 500 index is up more than 6 percent year to date through February 22 - might continue to be bolstered by the Fed's easing policy.

For sure, it seems brighter days lie ahead and here is why:

* The tide seems to be turning on the major fears: The euro zone probably won't collapse, the U.S. is continuing to rebound and hyperinflation is not around the corner. Meager inflation and interest rates combined with less global anxiety will give legs to the current stock rally. It's as if the mass psychology of pessimism has turned a corner.

* Although the U.S. economy is not adding enough jobs to fuel a robust recovery, that is still a positive for stocks since it means the Federal Reserve will keep its quantitative easing policy in place in some form. Interest rates held at nearly zero translate into low financing costs for nearly every company.

While low interest is still a losing game for savers in search of yields, those willing to take more risk will return to the stock market and find it there. Just keep in mind that once the jobless rate reaches 6.5 percent, the Fed might change its mind and raise rates. But that doesn't appear on anybody's radar screen at the moment.

* Consumer optimism is also building, although it is more like a slow dripping faucet than a geyser. According to the National Association of Business Economists (NABE) outlook released on Monday, consumer spending is forecast to rise to 2.4 percent next year from just under 2 percent this year.

* Business spending is turning around. Companies spend money when they sense an improving economic climate. A Thomson Reuters survey released on Friday found that spending plans by S&P 500 companies are exceeding analyst estimates. That translates into more capital expenditures and hiring.

* The U.S. real estate market continues to mend. Even more important in the NABE forecast is its forecast that residential investment is expected to grow nearly 15 percent over the next year along with higher home prices and housing starts. That will stoke the wealth effect as homeowners feel more of a cushion from real estate and invest more discretionary income in stocks.

* Low inflation - and the diminished expectation of hyper-inflation - also plays well on Wall Street. One signal that inflation angst is easing is the price of gold and investors who trade in it. Money management company PIMCO, the world's largest bond-fund manager; and leading hedge-fund managers George Soros and Julian Robertson all reduced their stakes in the SPDR Gold Shares ETF, the largest exchange-traded fund that holds pure bullion, according to regulatory filings.

All of this signals that these influential investors are perhaps less worried about the financial climate in the West and inflation in particular. Since the SPDR ETF is a direct investor in gold, it is one of my favorite proxy anxiety indexes. When its price rises, it is a sign of skittishness about economic health, the dollar's value and inflation. When it drops, it shows that nervousness is abating.

* Money flowing out of gold probably is not heading into bond funds. Sanguine investors are more at ease with higher stock risk premiums. In the past year, the SPDR fund has dropped nearly 5 percent (through January 30), with losses in the past one and three months. Its volume on February 20 was more than six times what it was November 20 of last year, so there a lot of dollars moving in and out of the fund.

Bullion prices have been steadily falling since last October. During the same period that gold has been declining in value, U.S. stocks have been on a steady rise. The SPDR S&P 500 ETF, which tracks the largest American stocks, has gained 16.5 percent year-to-date through January 30. When investors are optimistic, that is a sign that overall anxiety has possibly dropped.

* Investors are generally upbeat. While overall consumer confidence is not entirely robust, according to the Conference Board and Rasmussen Indexes, investors are still favoring the stock market. A one-year stock confidence index tracked by the Yale School of Management's International Center for Finance shows that some 72 percent of individuals and institutions think the stock market will rise in the coming year.

* Stocks might not be overvalued. The CAPE index prepared by Yale professor Robert Shiller, which shows a "cyclically adjusted price-earnings" ratio reflecting inflation-adjusted earnings from the previous decade, indicates an above-average valuation for stocks, although they are not anywhere near where they were in 2000, just before the dot-com crash. The CAPE ratio is currently at 23 and the average is 16.46. In 2000, the index was at 44, when stocks were incredibly overvalued. While stocks are certainly getting pricier, they do not appear to be irrationally overvalued.

One caveat is what happens with the U.S. budget sequester, which will trigger some $85 billion in federal spending cuts, beginning on March 1. If it is not resolved soon, the budget cuts might roil the U.S. economy and markets.

http://www.reuters.com/article/2013/02/25/us-column-wasik-anxiety-idUSBRE91O17M20130225

Comment:  

Faith in equities was at an all-time low as equity markets collapsed in 2008 and continued to do so during the start of 2009.

It is moments of maximum pessimism that the seeds of fantastic investment performance are sown.  

Mr. Market, in his usual modus operandi, is not discriminating between healthy, solid businesses, versus severely impaired businesses during these times.

For the true value investor, this historic market sell-off has created investment opportunities of historic proportions.  

As Buffett said in October 2008, "If you wait for robbins, spring will be over."

Why is stock investing so lucrative?

Emotion trading offers really cheap prices and really expensive prices.

Your job is to always calculate the intrinsic value of the business regardless of the size, then compare the value to the price it trades for.

Mr. Market vs. The Intelligent Investor

• The Intelligent Investor uses logical and mathematical analysis and doesn't trade on emotion.
• The Intelligent Investor buys things that have done bad whose fundamentals are intact.
• The Intelligent Investor sells things that have done good whose fundamentals are damaged.
• The Intelligent Investor takes advantage of the economic cycle as opposed to becoming a victim of it.
• The Intelligent Investor looks forward to economic collapses because that is when we make the most money.
• The Intelligent Investor fears a great booming economy because that is when we could lose everything.
• The Intelligent Investor milks the profits of a good business and doesn't sell unless the business has gone bad.
• The Intelligent Investor is aware that the future cannot be predicted.

http://equitybondtheory.com/mr-market-vs-intelligent-investor

A Primer to Ben Graham's Mr. Market (Video)

Warren Buffett - The Mr. Market Concept

Is Mr. Market still around? Is he still bipolar? You bet he is.

 M  R .   M A R  K  E T

Most of the time, the market is mostly accurate in pricing most stocks.  Millions of buyers and sellers haggling over price do a remarkably good job of valuing companies—on average. But sometimes, the price is not right; occasionally, it is very wrong indeed. And at such times, you need to understand Graham’s image of Mr. Market, probably the most brilliant metaphor ever created for explaining how stocks can become mispriced.

The manic-depressive Mr. Market does not always price stocks the way an appraiser or a private buyer would value a business. Instead, when stocks are going up, he happily pays more than their objective value; and, when they are going down, he is desperate to dump them for less than their true worth.  Is Mr. Market still around? Is he still bipolar? You bet he is

The Investor and Market Fluctuations: Price fluctuations have only one significant meaning for true investor (8)

The true investor when he owns a listed common stock, can take advantage of the daily market price or leave it alone, as dictated by his own judgment and inclination.

• He must take cognizance of important price movements, for otherwise his judgment will have nothing to work on. 
• Conceivably they may give him a warning signal which he will do well to heed—this in plain English means that he is to sell his shares because the price has gone down, foreboding worse things to come. 
• In our view such signals are misleading at least as often as they are helpful. 

Basically, price fluctuations have only one significant meaning for the true investor. 

• They provide him with an opportunity to buy wisely when prices fall sharply and 
• to sell wisely when they advance a great deal. 
• At other times he will do better if he forgets about the stock market and pays attention to his dividend returns and to the operating results of his companies

The Investor and Market Fluctuations: Mr. Market Parable (7)

Mr.Market Parable.

Imagine that in some private business you own a small share that cost you $1,000. One of your partners, named Mr. Market, is very obliging indeed.

• Every day he tells you what he thinks your interest is worth and furthermore offers either to buy you out or to sell you an additional interest on that basis. 
• Sometimes his idea of value appears plausible and justified by business developments and prospects as you know them. 
• Often, on the other hand, Mr.Market lets his enthusiasm or his fears run away with him, and the value he proposes seems to you a little short of silly.

If you are a prudent investor or a sensible businessman, will you let Mr. Market’s daily communication determine your view of the value of a $1,000 interest in the enterprise? Only in case you agree with him, or in case you want to trade with him. 

• You may be happy to sell out to him when he quotes you a ridiculously high price, and 
• equally happy to buy from him when his price is low. 
• But the rest of the time you will be wiser to form your own ideas of the value of your holdings, based on full reports from the company about its operations and financial position.

You must think for yourself and not allow the market to direct you.

Be warned.  Do not confuse the real success of an investment with its mirror of success in the stock market .

• The fact that a stock price rises does not ensure that the underlying business is doing well or that the price increase is justified by a corresponding increase in underlying value. 
• Likewise, a price fall in and of itself does not necessarily reflect adverse business developments or value deterioration.
• I t is vitally important for investors to distinguish stock price fluctuations from underlying business reality. 
• If the general tendency is for buying to beget more buying and selling to precipitate more selling, investors must fight the tendency to capitulate to market forces. 

You cannot ignore the market - ignoring a source of investment opportunities would obviously be a mistake -but you must think for yourself and not allow the market to direct you. 

• Value in relation to price, not price alone, must determine your investment decisions. 
• If you look to Mr. Market as a creator of investment opportunities (where price departs from underlying value), you have the makings of a value investor.  
• If you insist on looking to Mr. Market for investment guidance, however, you are probably best advised to hire someone else to manage your money.

Buffett: My job is to take advantage of the craziness of Mr. Market; whacking him when he gets way out of line

March 31, 2008

Question: What are your thoughts about the Chinese Stock market?



Buffett:


The Chinese stock market? I don’t know what markets are going to do.  When I was over in China they were bombarding me with questions about the market and of course you have these A shares, including Petro China, which was going public in China.  Petro China and others were trading at twice the price within China (at that time Chinese people were not permitted to buy shares in Hong Kong or in the United States) than outside China.  This was really extraordinary.  If you knew these restrictions were going to break down it would have been great to short the stocks in China and buy them elsewhere around the world.


But the Chinese stock market has 1.2 billion people waking up to the stock markets and having an investing or gambling urge.  The stock market was becoming wildly popular as we know in China.  Petro China at one time, based on the Chinese prices, was the most valuable company in the world, and was selling for over 1 trillion dollars, whereas Exxon was only worth 500 billion.  This made Petro China twice as valuable as the largest company in the world. 


I have no idea why and where that many people were relatively new to the market and were very excited about stocks.  You do know in the end you have to buy things on a basis of when you get a value for what you pay.  This seemed to lose relevance in a market like China.  They had a situation like that in Kuwait 20 years ago.  When a whole society, and a rich society, (certainly far richer than 15 years ago), a huge market opened up for them.  I have no idea whether the people get friendlier or crazier.  That is not my game.


My game is simply to buy something worth a dollar for 50 cents.  Then if they go crazy in the right direction it helps me and if they go crazy in the other direction I  just buy more.  


My job is to take advantage of craziness.  And that goes back to Ben Graham’s Intelligent Investor chapter 8.  If you are going to invest based on value with a partner (lets say Mr. Market) - let’s say you each own half of a McDonalds stand.  Every day he quotes a price at which he either wants to buy me out or sell me his interest.  If he hears a bad rumour he low-balls it, so I buy.  Other days he is all excited about some Burger King burning down and seeing some line ups and decides to give a high offer, so I sell.

If I’m going to have a partner like that what kind of partner do I want?  I want a psycho.  The stupider he gets the better I am going to do.  I don’t want some cool, calm rational partner.  I want somebody with huge ups and downs - a manic depressive.  Basically that’s what you get in the stock market some times.  As long as you realize he is there to serve you, and not to instruct you, you can make a lot of money.  You can’t listen to Mr. Market and think he must be right.  Only listen to what he says in the context of: when this guy gets way out of line I am going to whack him.  And basically that’s what you get in the stock market.

In China you can’t tell how far the markets will go to extremes.  You can’t tell that, I have no idea where the markets are going to go tomorrow or the next day or the next month or the next year.  I do know that in the end stocks tend to sell for what they are worth.  At least in the range of what they are worth.   They go all over the place in between - but tend to true value in the end.




A Discussion of Mr. Warren Buffett with Dr. George Athanassakos and
Ivey MBA and HBA students
Omaha, NB, March 31, 2008, 10:00 am - 12:00 pm

http://www.bengrahaminvesting.ca/Resources/Interviews_Notes/Buffett_March_31_2008.pdf

Invest intelligently by following these three principles of value investing

PRINCIPLES OF OPERATION 

Invest INTELLIGENTLY through adhering to the following three principles of value investing.

First, we think of stocks in the same way that a business person would think of a business.

Second, we do not follow, but instead try to take advantage of the manic depressive Mr. Market.

Third, we always look for a margin of safety.

Are you Mr. Market or Mr. Buffett? Rewire yourself to Invest like Mr. Buffett.

Warren Buffett's Investment Advice: Why It's So Hard to Follow

by Carlos Portocarrero on 18 March 2010

A year ago, I wrote a piece called Cash is King: Now What Should I do With It? 

After going through all the responsible options of what I could do with our pile of cash, I added one last one: what if I just threw it in the stock market and tried to double it?

Obviously, the fear of getting stabbed and divorced by my wife told me that this wasn't worth it—the risk was too high.

But you always wonder...what if...?

You'll see that the market had just bottomed out and was on a path to a steady recovery. Maybe it wasn't such a crazy idea to invest that pile of cash after all.

What Would've Happened

The day I published the story, the S&P 500 was at around 814. If I would've invested $10,000 in the S&P, I would've bought just over 12 "shares." Today, those "shares" would be worth $14,238. That's a 42% return in just under a year—an outstanding return.

What this Has to do With Warren Buffett

I've said this before many times: I'm a huge fan of Warren Buffett. I think his mix of intelligence, patience, and quirkiness is admirable. And one of his most famous sayings applies to my whole dilemma of investing (or not investing) my pile of money a year ago:

Be greedy when others are fearful and fearful when others are greedy

Back in March 2009, everyone was scared. From mutual fund managers to your average mom and pop store—we were all scared. No one knew what was going to happen to the economy and the stock market had just annihilated millions of dollars of people's money. It was the perfect time to put Warren Buffett's axiom to the test.

But that's where the problem lies: I was one of the people that was scared. There was no way I was putting all my hard-earned money into a machine that so many were saying was broken and had already cost so many people their life's savings.

And this is why Warren Buffett commands so much respect: he not only talks the talk, he walks the walk. He reacts differently than the rest of us to these situations: he trusts his instincts and doesn't get caught up in the panic that most of us do. And believe me, back then there was quite a bit of panic.

This is why we can't simply "invest like Warren Buffett." You have to have the cash, the brains, and the ability to overcome panic and fear. Forget about picking the right stocks—that's the least of it—the hardest part is not falling for all the hysteria and panic in the air.

The opposite is also true: the next time you see people acting greedy and feeling a little too comfortable with themselves and how much money they're making in the stock market—watch out. Something bad is about to happen.

http://www.wisebread.com/warren-buffetts-investment-advice-why-its-so-hard-to-follow

Why should I need to sell if my investment horizon is 50 years and above?

My friend asked me on the current market view. My answer to him is 'Why should I sell if my investment horizon is 50 years and above?'

Consider the following scenarios:

You are the business owner of a small business that co-own with Mr. Market. Everyday, Mr. Market will ask you to sell or buy according to his mood. Sometime, he is very optimistic of the future, and he is willing to buy at a higher price for your stake. Sometime, he is very pessimistic of the future, and he is willing to sell you at lower price for his stake.

We should always make use of Mr. Market's mood to gain the arbitrage profit from there.


http://www.jackphanginvestment.com/2011/07/why-should-i-need-to-sell-if-my.html

Why I lost money in some stocks in the stock market?

Why I lost money in some stocks in the stock market?

Buy low, sell high = GAIN
Buy high, sell low = LOSS

Factors to consider:
Price
Company

Price
If you can have the intellect and the emotional control to buy low, you have already WON most of the time, with a high probability. (I often quote, "many a sin is forgiven when you manage to buy at a low price.)

To be able to buy a share at a low price, means you have the ability to value this share. Valuation maybe based on assets, cash flow or multiples of earnings, book etc. Do not over-project growth in your valuation. You can only be approximately right in your valuation. This is alright, as long as you are not absolutely wrong in your valuation. There are also many qualitative factors that cannot be quantified in the valuation.

At a certain price, the stock is undervalued, at another it is fairly priced or overvalued. The ability to value a stock is the most important knowledge of a value investor.


Company
Choosing the right company to invest into is very important for someone who has the buy and hold for the long term philosophy. Choose the company in a business with durable competitive advantage. Its business moat is so huge and deep, that competitors find hard to erode their growth and profits over the long haul. Therefore, looking at the quality of the company's business and the management (integrity, intelligence and hard working) are important here.

Even the best company can fail. Look at the Dow Jones Index of 30 companies over the century. The index is made up of the best companies of each period. Many have faded or disappeared into oblivion. Of the 30 original companies at the start of the last century, only 1 or 2 of these are still in the Dow Jones index.

So, you may lose money when your high quality company with good management that you bought at undervalued price deteriorated in its business fundamentals permanently. In this situation, you will need to sell urgently to minimise your loss.


Conclusion
If you have done the hard work in selecting good quality company and valuing this company, the chances of losing money are few. From the above discussion, essentially, these are: (1) buying a poor quality company with no durable competitive advantage, and (2) paying a high price for your purchase.

This approach essentially means focusing on valuation and the company, and is not influenced by the market or herd mentality. The market is there to be taken advantage of, when the prices are right to buy or to sell, and otherwise for most of the time, can be ignored.

How to invest like Warren Buffett

The author's book on Warren Buffett, "The Midas Touch", summarises the favourite investing principles of the "Sage of Omaha".

By John Train
Published: 11:26AM BST 01 Jul 2009

12 Comments

Fanatical: offered a glass of good wine at a dinner, Warren Buffett said: 'Just hand me the money' Photo: AFP/GETTY

My book on Warren Buffett, "The Midas Touch", has just been published in Britain. It contains most of his favourite investing principles. Although time has passed since its original appearance, his ideas today are much the same.

Here is a handful of the central ones. They aren't easy: this is a competitive game.

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• Time for Buffett to answer some tough questions

1. The key to investing is found in this rule: buy a share as though you were buying the whole company.

To do that, you have to know what the enterprise is worth. Therefore, the investor should live in the world of companies, never of mathematical formulae.

In the latest annual meeting of Berkshire Hathaway, Buffett's company, his partner Charles Munger put it this way: "The worst decisions are often made with the most formal projections. They look so professional that you begin to believe the numbers are reality.

"You are taken in by the false precision. Business schools teach this stuff because they have to teach something."

2. A recent heresy is that market volatility equals risk. Quite the contrary!

For a serious investor, volatility creates opportunity. To use my own language, investment opportunity consists of the difference between reality and perception. High volatility increases that difference, and thus increases opportunity for the knowledgeable investor.

Mr Buffett says sardonically that he favours the dotty "efficient market theory" because it creates more opportunities for him.

3. As to growth versus value, Mr Buffett observes that "value" should include projected growth, notably "growth at a reasonable price" or Garp.

He looks for companies with a business "moat" around them that should have steady, reasonably predictable growth.

Perhaps a better phraseology for the growth versus value dichotomy might be "high growth" versus "bargain hunting". The analytical techniques, and investor temperaments, in the two approaches are quite different. One calls for a futurologist, the other for an accountant.

That said, for a taxpaying investor long-term growth is more convenient and more tax-efficient than seeking one bargain after another.

4. High technology, most emerging markets, leveraged buyouts, real estate and other hard to appraise exotica might as well not exist for Mr Buffett.

He follows the safest approach: stick to what you know best. However, many approaches are valid. Your advantage will be the extent to which your knowledge of a valid situation exceeds the market's.

It makes little difference how broad your knowledge is. One correct investment decision is as valuable as another. Mr Buffett says that one should only seek a handful of really big ideas in one's investing career. The key is to be right when you do decide, not to flutter about spreading yourself thin.

5. Investing in bad industries, or turnarounds, usually doesn't work.

A skilled surgeon can excise a tumour but to revive a moribund patient requires a magician. The princess hopes that when she kisses the toad a beautiful prince will spring up. In fact, alas, she will probably end up awash in toads.

6. Businesses that generate cash that they can reinvest at high rates of return over long periods are particularly attractive holdings.

Low-margin businesses that periodically call for more cash from their investors, which they can only invest at a modest rate of return, are a dismal affair. Differently put, if all else is the same, feel free to marry an heiress rather than a pauper.

7. Don't sell a great stock just because it has doubled.

It could be better value afterwards than it was before. The greatest stocks may go up 20 or even 100 times in a generation or two.

Peter Lynch, who built up Fidelity's Magellan fund, points out that the deluded policy of "rebalancing" more or less automatically because a stock has risen is a lot like pulling out the flowers in the garden and watering the weeds. Don't do it!

8. A grave corporate folly is offering your own underpriced stock for the fully valued stock of an acquisition candidate.

In that scenario, instead of paying 50p for £1 of value, you are paying £1 for 50p of value. Lunacy! Still, such situations are often generated by the megalomania of chief executives.

9. Avoid long-term bonds.

"We are bound to have inflation, given current policies. There are a lot of incentives for politicians in all countries to inflate their currencies," Mr Buffett says.

10. To do superlatively well, an investor, like a company manager, must be a fanatic.

By relentless concentration, Mr Buffett has moved billions of dollars from other people's pockets into his own. Alas, he doesn't enjoy what money can buy. He's a miser.

Once, offered a glass of good wine at a dinner, he said: "Just hand me the money." So, it may be helpful in business terms to be that focused, but not necessarily in human terms.

Still, to preserve capital, which is difficult, one should understand the principles, and Mr Buffett's are all good ones.

"The Midas Touch" by John Train is published by Harriman House. Mr Train founded Train Smith Investment Counsel and he has written hundreds of columns for the Wall Street Journal, the New York Times and Forbes magazine. Apart from "The Midas Touch", his best-selling books include "The Craft of Investing", "The Money Masters" and "The New Money Masters".

http://www.telegraph.co.uk/finance/personalfinance/investing/5708407/How-to-invest-like-Warren-Buffett.html